Everything you always wanted to know about the welfare state, but were afraid to ask

I had the good fortune yesterday to attend a lunch at which Tom Gordon Palmer, a Senior Fellow at the Cato Institute and an executive at the Atlas Network, was the guest speaker. In an entertaining, often amusing, and clear speech, Palmer introduced us to the realities of the welfare state.*

Palmer opened the “welfare state” portion of his talk by pointing out that, barring a few manifestly silly people, most people today don’t really believe in classic “socialism.” Instead, they support something equally pernicious: the welfare state. Indeed, the welfare state may be even worse than socialism because, by creating utterly dependent political constituencies in lands that are ostensibly democratic, it’s very difficult to correct or dismantle.

While the Romans may have had their bread and circuses, the modern welfare state started with Otto von Bismarck, who envisioned a world, not of bread and circuses, but of steel and blood. Bismarck was the original nationalist, imagining a people emotionally wedded to the state and financially dependent on it.

Palmer made clear that, from the beginning, the welfare state was not socialism. Unlike socialism, Bismarck’s welfare state, which was the template for all future welfare states, did not disallow private property, which was needed to fund welfare, nor did it centrally control the economy, although it certainly meddled in the economy. The welfare state was essentially a form of bribery using social services, such as health, education, and welfare. The result could be summed up this way: “We, the state, gave you something you consider essential to your well-being. Now you owe us your political support and, if called upon, your military service.”

Bismarck’s opponents saw which way this would end. They feared (correctly) that the welfare state would result in “a nation of helots.” Instead of making people dependent on the state for social service handouts, the opponents wanted the state to fund individually-owned accounts, so that citizens would have an ownership interest in their well-being, as well as marketplace power to choose which services they wanted. The opponents lost.

This first welfare state became the template for Hitler’s fascist Nazi movement. Right until the end of the war, Hitler was an extremely popular leader because he kept giving the German people things. Indeed, in the beginning, the war, rather than causing Germans to get less from the state, actually enabled them to get more. We all know that Hitler confiscated everything that belonged to the Jews, including their teeth and hair, and handed all these things over to the German people as a right or entitlement flowing to them from the State, furthering their allegiance to the Nazi party. What many don’t know is that Hitler’s troops also looted the treasures and treasuries of all occupied countries, sometimes through straightforward theft, and sometimes by devaluing the nation’s currency so that German troops were able to “purchase” goods for a fraction of their actual worth.

The Nazis were, to date, the most blood thirsty welfare state but, take away the whole bit about world domination and destroying “inferior” people, and you end up with a welfare state that pretty much looks like every other welfare state in the 21st century. According to Palmer, all welfare states share two common traits.

1. Welfare states use the PayGo or “Pay As You Go” method. On paper, PayGo sounds good: the government doesn’t run up a deficit to fund social welfare. Instead, it pays current expenses with current tax revenues. The government takes money from Taxpayer A and immediately hands it over to Welfare Recipient B. As long as there are more Taxpayers than Welfare Recipients, this system works. Problems start, however, when the balance shifts, so that there are more takers than givers. This problem is inevitable because of a principle called “the tragedy of the commons.”

Imagine a pond with a finite number of slow-breeding fish. The sensible thing for the community is to set a quota on people’s fishing rights so as not to deplete the resource and to give it a chance to regenerate. The sensible thing for the individual, however, is to take advantage of whatever fish the pond has to offer, since he operates on the assumption that, if he doesn’t catch them, somebody else will. It’s this “if I don’t take it someone else will” mentality that permeates so much of the welfare state, with people lining up for handouts because they’re there — never mind that, with everybody lining up, takers will swiftly outnumber givers. This is so because the takers will include large numbers of former givers who figured “why should I give when I can take?” and jumped in the welfare line.

As long as there are still givers, the system will limp on. As their numbers decrease, the welfare state uses its coercive power to get more money out of them. Eventually and inevitably, though, the golden goose is dead — the givers are broke and the nation’s wealth destroyed. And when the system stops working, the last generation of givers, the ones who were promised that there was a “lock box” or “trust fund” into which their money would be waiting for them, get nothing back for their efforts.

If what I’ve described sounds familiar to you, it should: It’s a pyramid or Ponzi scheme. If someone does it in the business world, he goes to jail. If the entire United States government does it, the takers keep voting into power the political party that promises most sincerely to keep the Ponzi scheme afloat.

The other thing about a government Ponzi scheme that differs from a business Ponzi scheme is the temporal factor. A business Ponzi scheme quickly runs out of new investors. A government scheme, however, reaches into the future, tagging unborn generations as mandatory contributors to an inherently corrupt economic plan.

2. Welfare states characterize the plan as one of “social rights.” Terminology matters. Privileges come and go, but rights are forever. Roosevelt knew this, which is why, in a 1944 speech, he announced a “second bill of rights” that perfectly encompasses all of the promises of the welfare state:

The right to a useful and remunerative job in the industries or shops or farms or mines of the nation;

The right to earn enough to provide adequate food and clothing and recreation;

The right of every farmer to raise and sell his products at a return which will give him and his family a decent living;

The right of every businessman, large and small, to trade in an atmosphere of freedom from unfair competition and domination by monopolies at home or abroad;

The right of every family to a decent home;

The right to adequate medical care and the opportunity to achieve and enjoy good health;

The right to adequate protection from the economic fears of old age, sickness, accident, and unemployment;

The right to a good education.

Unlike the Founders, Roosevelt didn’t bother to convene a constitutional convention to make his new “bill of rights” official. Instead, he relied on politician’s greed for votes to make it happen. He knew that, if you give people things, they will vote for you. The race was on for both parties to give voters the most things. The only differences between the parties were the kind of things they would hand out and whether they wanted to pay for these things now or later. The Democrats usually won this race, because they’d give everything and just put it on the government’s tab, to be paid at some indeterminate future date.

In addition to its permanence, there’s another advantage to a “right”: It’s not charity, thereby bypassing opposition from people who might have moral objections to receiving charity. Of course, once the welfare system becomes entrenched, that moral generation quickly dies out.

What we’re see today in America is what happened in Greece, Italy, and Spain in the last few of years: The PayGO system is collapsing because the takers vastly outnumber the givers and, in any event, the givers have nothing left to give. Our current entitlement obligations — which are separate from government debt, because we’ve been stealing from the unborn, rather than borrowing from existing creditors — are somewhere in the range of at least $147 trillion.

Moreover, to the extent entitlements must be paid now using current revenues, entitlement spending is swamping government budgets across America. In California, for example, pension payments gobble up most of the state’s budget, leaving no money for other state expenditures, such as basic infrastructure maintenance or debt service.

What Palmer stressed is that, while the welfare state feels like socialism, because of the huge welfare transfer, it’s not socialism. We do not have a centrally managed economy or one without private ownership. What we have, instead, is a government playing a perverted Robin Hood game — it steals from those it decides are rich and gives to those whose votes it wants.

A perfect example of the speed with which the welfare state destroys the economy, said Palmer, is Italy. What few people know or remember is that Italy had a free market after WWII and, not coincidentally, had a huge economic boom, bigger even than Germany’s. That’s why the 1960s were the era of la dolce vita: Italians were young and their economy was vibrant. And that was the moment, in the 1960s, when do-gooders said, “We’re so rich, let’s spread the wealth.” Rather than setting up a true trust fund, or having people pay into their own lock box accounts, Italy set up a welfare state . . . and that was the beginning of the end.

One of the big downsides of the welfare state is that it always ends badly. True socialist economies actually can lateral over to a marketplace economy by having the government back off of economic management. We’ve seen this in action in some former Soviet bloc countries, such as Latvia and Estonia. Dying welfare states, however, are corrupt from top to bottom, and are therefore more likely to end up as Nazi Germany. In Greece, for example, the public is being torn two ways, both equally evil: Marxist and Neo-Nazi groups are growing fast. The latter are every bit as violently antisemitic as the original Nazis were (never mind that there are almost no Jews in Greece).

The absence of Jews within their borders is not a problem for nascent Neo-Nazi movements in bankrupt welfare states. Indeed, image conscious Neo-Nazis in places as diverse as Greece and Hungary try not to use the word “Jews” (unless they’re talking about the evil Zionist Jews in Israel, of course). Instead, they talk about “New York financial interests” or “dirty foreigners coming to get our social benefits.”

As to that last point, Palmer pointed out that the “dirty foreigners” are on the bottom of the Ponzi scheme pyramid, paying in more than they’ll ever get out. (And no, I don’t know whether he was referring to the Turkish, Algerian, and Moroccan workers all over Europe when he said this, or only to America’s self-imported immigrants from Mexico.)

Because welfare states always bankrupt themselves, default is inevitable. In America, this bankruptcy, which is roughly 20 years in the future, can take three forms: (1) default on the national debt, which is unlikely; (2) a change in the welfare formula (later retirement, death panels, etc.), which is more likely; and (3) inflation, which is most likely and completely disastrous, because it destroys a nation’s wealth, as well as destroying individual lives along the way.

And speaking of wealth, Palmer says that there are two alternatives to a crash. The first is self-help and wealth-creation, which is achieved through secure property rights; a reliable, relatively un-corrupt legal system; and free trade. As an example of this method in action, Palmer told us about Kakha Bendukidze, the man who saved the Republic of Georgia during his tenure as Minister of Economy, Minister for Reform Coordination, and Head of the Chancellery of Government of Georgia. My notes are scrambled about Bendukidze’s acts (they just say “wiped out most of the government”), so let me quote Wikipedia:

He is known as a committed libertarian and strong supporter of market economy, deregulation and privatization, stating that the Georgian government should sell everything except its honor. During 2004-2007, under his leadership, Georgia became the top-reforming country in the world, according to the World Bank’s Doing Business report. In particular, Georgia jumped from 137 to 11 on the ease of doing business scale, ahead of Germany and France.

Since the weakening of the democratic credentials of the Saakashvili government after the police crackdown of the 2007 protests, the government has put the stress on his successful economic reforms. Bendukidze was pivotal in the libertarian reforms launched under Saakashvili, including one of the least restrictive labour codes, the lowest flat income tax rates (12%) and some of the lowest customs rates worldwide, along with the drastic reduction of necessary licenses and permits for business.

In addition to his wildly successful economic reforms, Bendukidze cracked down on rampant corruption and brutality in Georgia’s police force. He did it by doing away with the police entirely, including their buildings, which were filled with windowless, blood-stained “interrogation” rooms. When people objected, he said “If you’re sitting in a dark room and you turn off the lights, does it get darker?” In other words, if the police are themselves a crime problem, getting rid of them probably won’t increase crime. Bendukidze then built up a whole new police force, housed in buildings with windows into every room.

The second alternative to default and collapse is mutual aid societies. America used to be filled with them, although the young generation probably has never heard of them. We oldsters knew them as the Elks, the Shriners, the Freemasons, etc. [Update: I forgot to add that, the only real surviving mutual aid society in America, according to Palmer, is Alcoholics Anonymous.] These societies had deep roots, going back to Roman burial societies. They were voluntary associations, complete with codes of conducts and secret rituals, that bound people tightly together. They transcended class. The local gentry would rub shoulders with the butcher and baker as they went through their Masonic or Shriner rituals.

The mutual aid societies had funds into which everyone paid (presumably on a sliding scale, giving their egalitarian membership). These funds would then be disbursed to members in need. Because small, social groups managed the funds, they kept track of the deserving poor versus the undeserving poor. The latter did not get access to these emergency funds. The societies also kept track of moral hazard issues: people were socially pressured to avoid dangerous behaviors that could deplete the funds.

Welfare states hate mutual aid societies because they are the antithesis of big government (whether in the form of socialism or the welfare state). In England, the Fabians, who wanted socialism without bloodshed, used sneaky legislation to destroy these societies.

In 1911, the Fabians got the government to enact the National Health Act. Before the act, a mutual aid society member might voluntarily pay a small amount of money every month into the communal pot. In exchange, he and his family would get access to perhaps seven different doctors, kind of like an HMO. The National Health Act mandated that all citizens pay a proportional tax to the government, in exchange for which they’d get access to their original seven doctors, plus perhaps five more. Rather than paying twice for the same benefit, Brits ended their voluntary associations and paid only the coerced tax. (Does this sound familiar to you?) Once all of the voluntary associations were gone, Britain went to the next step, which was to socialize medicine. (I swear that this sounds familiar to me, and I’m talking about recent history, not events overseas in the 20th century.)

At this point in Palmer’s talk, I ran out of paper and began to write in microscopic script that I can no longer read. I can tell you, though, that it is possible to back away from the precipice towards which we’re speeding. As an example, Palmer pointed to Canada which had, as he said, an “adult discussion” about the coming economic collapse. Intelligent, numerate politicians from the center left and center right identified the problems, talked about solutions, and cut Canada’s indebtedness by 50%.

Palmer repeatedly stressed the necessity of having a bipartisan discussion. If Republicans get hold of government, their reforms will be as suspect to 50% of Americans as the Democrats’ “reforms” were. Moreover, as the Bush presidency showed, Republicans with the bit in their teeth spend almost as much as Democrats do, although they use the money to woo different constituencies. Only divided government slows government spending. The bipartisan aspect of any discussion about avoiding default is the equivalent, I think, along the lines of the fact that it takes two thieves to strike an honest bargain.

(Let me just add here that, when it comes to Republican spending, Palmer expressed his distaste for neocons who, he believes, substitute nationalism for socialism, with equally bad social and economic results. He cited David Brooks as an example, since David Brooks wants to spend lots of money on all sorts of Big Government things that aggrandize America. I agree that Brooks is wrong, but I don’t see him as a neocon. He’s simply a leftie who likes America.)

The problem today with that bipartisan strategy, says Palmer, is the lack of numerate adults in politics, especially among the Democrats. There were numerate Democrats in the Clinton administration, but Obama’s administration is composed completely of ideologues who are uninterested in facts.

Finally, I see scrawled in my notes the word Putin. Putin, says Palmer, is a pure National Socialist. Those who know him say he’s also a stone-cold killer, who will, without blinking, kill people who stand in the way of his political vision (while ignoring those who don’t). Like Hitler, he uses social welfare to buy people. Like Hitler, he has dreams of vast geographic expansion, with occupied states funding his social welfare. And like Hitler, he’s found a scapegoat which, in Putin’s case, is homosexuals. Putin’s war against homosexuals ratchets up daily, to the point at which it’s somewhere around 1935 for homosexuals unlucky enough to be in Putin’s Russia.

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*I’m basing this post on my scribbled notes, so I apologize in advance if I’ve erred here. I’m sending a copy of this post to Tom Gordon Palmer, so that he can correct me if I put the wrong words in his mouth or, worse, mangled his ideas.

Re the history of the German welfare state: one of Kipling’s lesser-known poems is a response to Kaiser Wilhelm II’s proposal (circa 1890) for an expanded social-welfare system, ideally to encompass other European countries in addition to Germany and to limit “destructive competition” in industry. I posted the whole thing in comments here.

Translated into modern and unpoetic terminology, Kipling seems to be saying that female hypergamy drives male competitiveness, and you can’t level out the second unless you somehow eliminate the first.

Murray Lawrence

“…a nation of helots.” I love that phrase, because it reminds me of Walter Brennan’s constant refrain in his role as Gary Cooper’s Depression-era sidekick tramp in Frank Capra’s Meet John Doe. As the character dubbed “Colonel,” he is the film’s cantankerous social critic for whom the entire establishment is a gang of “helots,” as when he plows through a crowd of reporters crying “gangway, helots” and in his extended monologue to “Long John” (Cooper) and “Beany” on middle-class illusions of the American dream: “I seen guys like you go under before. Guys that never had a worry. Then they got ahold of some dough and went goofy. . . . The first thing that happens to a guy like that – he starts wantin’ to go into restaurants and sit at a table and eat salads – and cup cakes- and tea . . . The next thing the dope wants is a room. Yes sir, a room with steam heat! And curtains and rugs and ‘fore you know it he’s all softened up and can’t sleep ‘less he has a bed. . . . I seen plenty of fellers start out like that and end up with a bank account! . . . And let me tell you, Long John. When you become a guy with a bank account, they got you. Yes, sir, they got you!”
Beany: “Who’s got him?”
Colonel: “The heelots!”
And who are they? People “in every line of business – shoes, hats, automobiles, radios, furniture, everything. They’re all nice, lovable people . . . Then you get hold of some dough, and what happens? All those nice, sweet, lovable people become heelots. A lotta heels.”

While I will concede that the definition of socialism has become the government ownership of the means of production, I contend that is a ruse. A ruse thoroughly fallen for even by those who understand socialism’s evils. It is along the lines that communism was offered up as the evil when it was really the socialism in those governments that did the great harm.

I found this definition a few years ago to be very informative:

“The Socialist, under this definition, would be the man who, in general, distrusts the effects of individual initiative and individual enterprise ; who is easily convinced of the utility of an assumption, by the State, of functions which have hitherto been left to personal choices and personal aims ; and who, in fact, supports and advocates many and large schemes of this character.

A man of whom all this could be said might, in strict justice, be termed a Socialist. The extreme Socialist is he who would make the State all in all, individual initiative and enterprise disappearing in that engrossing democracy of labor to which he aspires. In his view, the powers and rights of the State represent the sum of all the powers and all the rights of the individuals who compose it ; and government becomes the organ of society in respect to all its interests and all its acts. So much for the Socialist.

Socialism, under our definition, would be a term properly to be applied (1) to the aggregate of many and large schemes of this nature, actually urged for present or early adoption ; or (2) to a programme contemplated, at whatever distance, for the gradual replacement of private by public activity ; or (3) to an observed movement or tendency, of a highly marked character, in the direction indicated. ”

The welfare state is just a variant that they found fewer antibodies against in the body of liberal democracy.

“That a statesman, with a due sense of his responsibility, should so far mislead the people by promises which can only, in the long run, lead to disappointment, is a bad sign of our times. Surely he must know that if the people once taste the sweets of plunder, if they begin to enjoy the unearned increment, there will be larger demands made, and that the only end to those demands will be the end of that useful milk-cow, the capitalist class. Having recreation at the expense of another can only be a temporary, a very temporary, expedient. In the first place the wealth of this country is not, by any means, so great as to enable the whole of the inhabitants to enjoy life in the way suggested, and even if it were, a time would very soon come when the person who supplied the recreation would have no more to “pay the piper” with, and then, we fear, the dancing must cease, or go on without music. But will it last even so long? An American candidate said “Capital is sensitive; it shrinks from the very appearance of danger.” We think that it is shrinking in this country, and if capital goes beyond the seas, if it is taken to other and safer countries, we shall have the poor of this country dancing to quite other tunes than those which are being composed by their over-sanguine guides for their delectation. We shall have the poor of this country condemned to misery and starvation. They themselves cannot see this, but it behoves those who would constitute themselves the leaders of the people to take heed lest they mislead them into such ” sloughs of despond.” “p 18-19

Maybe the greatest critics of Socialism the Austrian school were well aware of the difference between the welfare state and “classic” socialism but they discounted it. Von Mises used the word destructionism instead of Socialism because the key point was that in either the case the destruction of capital that could be used for investment and raising standard of living for all was instead in either case appropriated and used for a few.
The key point that the Austrian school stressed was that the problem was the promise of security. That meant that there really was no safety net but a permanent relocation of assets. Not only do the producers fall into becoming takers but the shrinking pool means different cover philosophies that justify who has to work and who gets the output and they won’t be the same people.
There is no difference between the welfare state and classic socialism because the government is not taking the so called means of production to create efficiencies but in order to appropriate and ration the output. In fact that is what turned the Austrian school economics from ardent socialists to ardent critics. Their job was to make the appropriation of assets to the government and centralized planning work. They were the very best and brightest and they couldn’t do it. Not only was central planning insufficient to respond to the market but the more you adjust the more the underlying “destructionism” becomes apparent. You can’t just make things more efficient. Even a worthwhile idea must be accompanied by a payoff to someone or it won’t ever get implemented. The payoffs only reduce the efficiency of output anyway.

Matt_SE

Great piece, Book, though the holes in your notes tend to disrupt the flow of the narrative. Also, great comments so far.

“…the opponents wanted the state to fund individually-owned accounts, so that citizens would have an ownership interest in their well-being, as well as marketplace power to choose which services they wanted. The opponents lost.”

And there’s the problem: the opponents weren’t really “opponents” so much as “rivals.” Just like the Democrats and establishment Republicans/neocons, they both start from the same premise: that big government will exist. They only differ in to whom the benefits are given.
As far as the Bismarck example: what the state funds, it will eventually control. What it controls, it owns. This is another reflection on the tired, tired, SO TIRED difference between socialism and fascism vis-a-vis “ownership.”
To cut to the chase: control *is* ownership. Functionally, there is no difference.
In practice, fascism is only *marginally* more efficient. But it, too, is destined to fail.
Socialism taken to the extreme (Communism) affords industry only one option: the party line. Producers will make what the party wants, when it wants, in the manner it wants.
Fascism allows a small number of options, all governed by constraints. Industry is allowed to choose the option that makes the most sense for them, but the result is still monumentally less efficient than the free market.

Obama isn’t a socialist, he’s a fascist. He’s been very carefully co-opting industry for years to yoke them to the fascist agenda. Disturbingly, many of them are enthusiastically responding to the call. (Remind me to tell you about my recent Wal-Mart training experience)

All this was foreseen by the founders, who realized all republics in history ended the same way: the game was over when some of the people realized they could vote themselves [other people’s] money.

There has been much discussion over whether the Nazis were really socialists as the name of their party indicates, or (as some leftists argue) this was just a word they inserted for vote-getting purposes.

The second alternative to default and collapse is mutual aid societies. America used to be filled with them, although the young generation probably has never heard of them.

This struck a chord. The oldest mutual aid societies are probably religious institutions, which are declining in the western world.

Where I worship we get occasion appeals for charity from local people. In times past they would show up for worship service, bible in hand, talk the talk, and sit through a 1 hour sermon, at the least. There is *mutual* activity there, if only a superficial amount.

Now assistance seekers leave a voice mail, not bothering to show up in person. An example: we responded to a young man needing help paying his utility bill. He showed up before service started and said “Where’s my check?” He left immediately without saying thanks. We have stopped even acknowledging most of these requests.

We do have occasional requests from members fallen on hard times, and they get whatever they need. But those are people who attend and participate regularly – thus the *mutual” aspect. The voice mail supplicants could get help so easily, if their sense of entitlement didn’t prevent them from even minimal participation.

GingerB

Fascinating! Long ago, when I was a recent college graduate I worked at DFCS, in the Eligibility Dept. When someone got a job and became ineligible I remember giving her a hug and sending her off, thinking I might not see her again. Ha! Over 50% of my clients were back again within 6 months. So we had to process her application all over again. In those days we didn’t have computers so we had to fill out all the forms manually and the client had to bring in all the current information. There was a time limit, so in order process the app. in a timely manner it all had to be done by a certain date or it would be counted as an error.
I especially enjoyed this where you talked about the “deserving” vs. the “undeserving” poor. I finally left this job when I realized we were sacrificing the occasionally needy for the permanently needy. By that I don’t mean disabled people, but young healthy teen girls who got “caught” over and over because of their own ignorance and irresponsibility.

GingerB

I will credit my time at the “Welfare office” with the realization that I’m a Conservative. Before that I thought I was a Liberal- but a GA Lib as opposed to a CA Lib. Ah, the time of Peace and Love!

lee

My dad was an Elk. Or a member of the Benevolent and Protective Order of Elks. I am not sure about how official it was, but they did help out members, as members needed help. And especially, members’ widows. Maybe not to the degree the organization may have a couple of decades earlier. (Though it started out as a club to get around drinking laws.)